What connects Father Brown’s deduction that a trusted old soldier had been a villain with Autonomy’s tracing of Jérôme Kerviel’s activities at Société Générale? Both stories involved not just hiding leaves in forests but making a forest in which to hide the leaves. Companies need to get a grip on their data.
The Times has been running a rather good series of supplements on matters relevant to business. Last week’s was on Corporate Fraud, and I and other e-Disclosure commentators were interviewed for an article called Finding a hidden leaf in a forest (page 5) .
The heading is a misquotation. What I actually said in my interview was “Where does a wise man hide a leaf?”. This expression was used by Lord Justice Jacob in Nichia v Argos in his discussion about mass disclosure as opposed to the consideration of documents “with some care to decide whether they should be disclosed”. His paragraph 47 says this:
“…it is the downstream costs caused by the disclosure which so often are so substantial and so pointless. It can even be said, in cases of massive disclosure, that there is a real risk that the really important documents will get overlooked. Where does a wise man hide a leaf?”
The quotation actually comes from one of G K Chesterton’s Father Brown stories, The Sign of the Broken Sword. The analogy which Lord Justice Jacob took from it for e-disclosure is even more apt for fraud investigations when you know the whole story.
The scene in is a churchyard at night in which there is a monument to an old soldier, General St. Clair, whose sword is missing its tip. The graveyard is a place to which “wagonettes came full of Americans and cultured suburbans to see the sepulchre” (I leave you to ponder on that curious pairing of interest groups). The passage quoted in Nichia reads:
After the first silence the small man said to the other:
“Where does a wise man hide a pebble?”
And the tall man answered in a low voice: “on the beach”.
The small man nodded, and after a short silence said: “Where does a wise man hide a leaf?”.
And the other answered: “In the forest.”
At a later point, the small man (who is Father Brown) asks again:
“Where does a wise man hide a leaf? In the forest. But what does he do if there is no forest? … He grows a forest to hide it in…. A fearful sin”.
“If there were no forest, he would make a forest. And if he wished to hide a dead leaf, he would make a dead forest.”
And if a man had to hide a dead body, he would make a field of dead bodies to hide it in”.
It appears that the general was not the virtuous man he appeared to be – “he kept a harem, he tortured witnesses, he amassed shameful gold” and, as Father Brown said:
“there is this about such evil, that it opens door after door in hell, and always into smaller and smaller chambers. This is the real case against crime, that a man does not become wilder and wilder, but only meaner and meaner. St. Clare was soon suffocated by difficulties of bribery and blackmail; and needed more and more cash”.
What the general had done, it transpired, was to kill an officer who threatened to unmask him (breaking the tip off his sword in the process) and then committed his forces to a battle which they were bound to lose so that many other bodies would conceal the body of the man he had murdered.
I tell you this in detail because you will instantly recognise it as a model for the kinds of modern frauds described in the rest of the Times supplement. You do not need the final stage of Chesterton’s story to recognise the fraudster who starts small to solve a one-off and, as he thinks, temporary problem (keeping up the harem perhaps), and becomes drawn into more, either to cover his tracks or because, having played and won once, the allure of other gains becomes too great. You would not necessarily say, with Chesterton, that he “opens door after door in hell, and always into smaller and smaller chambers”, but the idea of just another couple of actions to hide the last one is much the same. Fraudulent invoicing, reverse commissions and the rest can be hidden amidst a mass of genuine transactions, and yet others can be invented – the equivalent of General St. Clair’s pile of bodies – to conceal one dishonest one.
Whilst it would have been nice if they had got the quotation right, the reference to leaves in forests is a neat encapsulation of what can be involved in tracking down corporate fraud. Jérôme Kerviel, the so-called “rogue trader” at Société Générale, seems to have been motivated by the high-wire illicit deals which, had his initial run continued, might have netted the bank very large profits. When they went wrong, he was forced to engage in ever larger trades to conceal his losses, with high volumes of trades hidden behind faked hedge trades. The software which Autonomy used to work out quickly what had been going on uses the same technology as exists in early case assessment and document review software. The range of tools which I am quoted in the article as referring to – “keyword and conceptual filtering, duplication and near-duplicate processing” amongst others can be used, as I put it, “reactively, retrospectively or in anticipation of fraud”.
The contributions to the article from Greg Wildisen of Epic Systems, Robert Brown of First Advantage and Alex Dunstan-Lee of KPMG go to the same effect. Greater volumes of data and different types of information require ever greater sophistication to handle them in a timely and cost-effective manner, particularly where one is dealing with criminal minds at least as sophisticated as those who devise the software. The need to detect a fraud is no different in kind from the need to identify uncompetitive behaviour or some other breach of a regulatory code which companies are obliged to monitor on pain of large penalties.
Electronic disclosure / e-discovery is, by its nature, retrospective in that one is dealing with data which already exists. It is no less important to hack through it quickly, partly because of court-imposed deadlines and partly because clients simply cannot afford the lawyer hours required to cover the same ground manually. I mean that literally – not just “they are unwilling to pay” but “cannot afford”. Some of these sophisticated applications are not cheap, but the cost has to be set against savings of both time and money, as well as their ability to find the leaf in the forest or the pebble on the beach.
I am pleased that the article ended with my point about the clients’ role in being ready for litigation. I was more forceful in the interview then I am quoted as being: lawyers are far from blameless when it comes to the costs of litigation, and the civil justice process undoubtedly needs improvement, but the client must bear its share of the blame for the time and cost of litigation, for its lack of preparedness for a regulator and for the work involve in detecting fraud. Companies are entitled to assess the risk that they might need to find the leaves, and to weigh that risk against the cost of being ready to look for them. If they decide that the cost is not worth it, then the inevitable corollary is that they pay a price when the leaves must be found in a hurry. You do not blame the lawyers or the system – and nor do you blithely assert in your disclosure statement that it is disproportionate to look for documents which are critical to the case and which ought to be disclosed.
The recent case of Earles v Barclays Bank neatly illustrates the point in a civil context. If that is not reason enough to get your house in order, the fear that a regulator might make demands for documents or that, as with Nick Leeson’s activities at Barings Bank, an undiscovered fraud might bring the business down, acts as a powerful incentive to get a grip on your data.